positive externalities

Cards (11)

  • Positive externalities

    Benefits to third parties as a result of the actions of a separate agent
  • Positive externalities in consumption
    • Benefits are to third parties as a result of the actions of consumers
  • Positive externalities in consumption
    • Healthcare - being vaccinated against the flu
    • Education - individuals getting educated
  • Third parties
    Economic agents not involved in the transaction or the activity at all
  • Individuals are educated
    Rest of society benefits because individuals will be more productive, have higher incomes, pay more tax, which can be used to provide socially desirable things
  • Individuals exercise and eat healthy

    Employers benefit from higher productivity of their workers
  • Diagram for positive externalities in consumption
    • Marginal social benefit is higher than marginal private benefit
    • Free market allocates at private optimum (Q1, P1)
    • Social optimum is where MSB=MSC (Q*, P*)
    • Welfare loss is the triangle pointing towards the social optimum
  • Positive externalities in production
    Benefits to third parties as a result of the actions of producers
  • Positive externalities in production
    • Firms offering high-quality in-work training schemes - other firms can poach trained workers
    • Firms engaging in R&D - other firms can copy the new technologies
  • Diagram for positive externalities in production
    • Marginal social cost is lower than marginal private cost
    • Free market allocates at private optimum (Q1, P1)
    • Social optimum is where MSC=MSB (Q*, P*)
    • Welfare loss is the triangle pointing towards the social optimum
  • Producers and consumers ignore the external benefits, leading to under-production and under-consumption compared to the social optimum, resulting in a misallocation of resources and welfare loss